Muni credit remained stable in the third quarter, S&P analysts said

Muni credit quality remained largely stable in the third quarter despite inflationary pressures, according to S&P Global Ratings.

Upgrades in U.S. public finance were down to 180 in the third quarter from 190 in the second quarter; and downgrades were up to 87 in the third quarter from 64 in the second quarter, according to an S&P report published Tuesday.

“Downgrades are still very low, averaging 75 over the past six quarters, compared with an average of 207 over each of the previous six quarters,” said Nick Kraemer, head of S&P Global Ratings Performance Analytics.

Economic conditions in the third quarter contributed to a beneficial credit quality environment, according to S&P analysts.

“While economic growth was slow, there was growth, resulting in healthy revenue expansion,” S&P wrote. “When combined with stimulus funds, this produced a steady stream of upgrades across multiple sectors.”

The largest beneficiaries were transportation obligors, such as airports, as well as local governments and school districts, according to the ratings agency.

The nonhousing ratio of upgrades to downgrades fell to 2.25 from 3, and the ratio of housing upgrades to downgrades fell to 0.92 from 2.

Improving finances were the most common cause cited for positive rating actions, with 76, while improving operations resulted in 43 upgrades, S&P analysts wrote. On the downside, S&P analysts said, operations led as the most common reason for downgrades with 30, followed by finances with 24.

Over the past 12 quarters, housing has averaged 23 downgrades and 10 upgrades.

There was one default in the third quarter, National Campus & Community Development Corp., which defaulted in July on two student housing revenue bonds. That default lifted the total of S&P rated muni defaults for 2022 to two.

Local governments had 101 upgrades and 38 downgrades in the third quarter of 2022. Utilities saw 16 upgrades and five downgrades. Higher education and charter schools had eight downgrades and only one upgrade in third quarter.

There were no state general obligation rating changes in the third quarter, down from two in the second quarter.